In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we'll evaluate JB Hi-Fi Limited (ASX:JBH) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for JB Hi-Fi:
0.24 = AU$363m ÷ (AU$2.8b - AU$1.3b) (Based on the trailing twelve months to December 2018.)
Therefore, JB Hi-Fi has an ROCE of 24%.
Check out our latest analysis for JB Hi-Fi
Does JB Hi-Fi Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that JB Hi-Fi's ROCE is meaningfully better than the 15% average in the Specialty Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, JB Hi-Fi's ROCE in absolute terms currently looks quite high.
JB Hi-Fi's current ROCE of 24% is lower than its ROCE in the past, which was 48%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how JB Hi-Fi's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for JB Hi-Fi.